What Is Title Insurance, Anyway? Part 1- What Goes Into A Title Policy
Elsewhere on our website, we have discussed the importance of reviewing title insurance policies and preliminary commitments. While those topics are important for people involved in real estate transactions, this post is devoted to a more basic explanation of title insurance. As explained in greater detail in this series of blog posts, title insurance generally protects an insured against losses suffered on account of undisclosed matters which impair the insured’s title interest in real estate.
Knowing who owns what is critical to all aspects of real estate, whether that involves lending against real property, buying it, leasing it, sharing a boundary, developing it, or owning real property in common with others. In most (but not all) cases, the public record (i.e., documents recorded in the County assessor/recorder’s office) is the source to which we look to figure out who owns what. Real estate interests can be complicated, and when questions of rights arise, we cannot answer the question by a simple determination of who owns the property. Rather, property rights are frequently limited and conditional, subject to security interests, easements, covenants, etc.
It is not always an easy task to search the public records and confidently determine one’s property rights. Some of the many reasons for this include: (1) not all records are accessible online; (2) parcels sometimes get subdivided or merged; (3) boundaries to property can change, thereby altering the legal description; (4) modern tax parcel numbers; (5) clerical errors; and (6) complex or ambiguous language in legal documents. Also, each time ownership of property changes hands, a proper investigation requires looking up matters attached to the former owner (either as grantee or grantor), and when property has numerous owners in the chain of title, the amount of research to sort out property rights increases.
Title companies typically maintain their own database or physical repository of documents recorded in the public records. These information centers are sometimes referred to as “plants.” The title company has a system for pulling documents and information from the public records, and organizing in a way to make it easier to research and determine which documents might affect title to property. When a title company prepares to potentially issue a title policy (either to a purchaser or a lender), the title company ordinarily generates and issues a document called a “preliminary commitment,” often referred to as a “title report.” The document tells the purchaser or lender what the contemplated insuring terms will be if a title policy gets issued.
The buyer (and lender if there is a lender) review the preliminary commitment before the sale or loan closes. Generally, the most important section of the preliminary commitment is the list of special exceptions to coverage, generally known listed in “Schedule B” of the document. These will consist of the non-standard portions of the policy which are specific to the property, such as liens, judgments, easements, mortgages, covenants, maintenance agreements, etc. The buyer or lender then notifies the other party(ies) whether any title matters showing up in this section must be resolved and removed from the commitment before the transaction can close. As a most typical example, properties may have an existing mortgage, which the buyer or lender demands be paid off and released as a condition of the loan or purchase. The buyer or lender will notify the seller or borrower that the mortgage must be paid off so that the title company will remove the exception from the commitment. This way, when the title policy gets issued at closing, the title company insures title free and clear of the prior mortgage.
Thus, in a nutshell, a title policy is the culmination of: (1) what the title company found in its research which it considered to be of concern; and (2) the acceptance or rejection by the insured of the special exceptions listed by the title company. The insured pays a one-time premium for the policy, which then insures title subject to the conditions and exceptions listed in the final policy.
In the next part of this blog post, I will explain how a title policy does and does not protect you.
The lawyers at Beresford Booth have a wealth of knowledge about real estate transactions and how to protect yourself as a buyer, seller, or lender. We would be happy to assist you. Please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.